Executive Summary
The Inflation Reduction Act (IRA) of 2022 has significantly expanded tax incentives for clean energy projects through enhancements to the Investment Tax Credit (ITC) under Sections 48 and 48E of the Internal Revenue Code. A key feature of these incentives is the opportunity for taxpayers to claim a fivefold increase in the credit amount by satisfying Prevailing Wage and Apprenticeship (PWA) requirements. For projects exceeding 1 megawatt (MW) in capacity, compliance with PWA is essential to access the full bonus credit, avoiding a reduction to one-fifth of the enhanced amount.
Project Labor Agreements (PLAs) play a pivotal role in this framework. Defined as pre-hire collective bargaining agreements tailored to specific construction projects, PLAs facilitate adherence to PWA standards by incorporating provisions for prevailing wages, apprenticeship utilization, and dispute resolution. While not mandatory, qualifying PLAs offer taxpayers a safeguard against penalties for inadvertent non-compliance, provided corrective actions are taken promptly. Typically adopted by large-scale construction firms, unionized contractors, and developers of infrastructure projects, PLAs are often synonymous with or evolve into Community Workforce Agreements in certain contexts.
This white paper explores the PLA provisions within the Section 48/48E ITC, defines PLAs, identifies common adopters, discusses alternative nomenclature, and elucidates the benefits for taxpayers pursuing the PWA bonus on projects over 1 MW. By leveraging PLAs, taxpayers can mitigate risks, ensure project efficiency, and maximize tax benefits in the transition to clean energy.
Introduction to Section 48 and 48E Investment Tax Credits
The IRA amended and introduced several tax credits to accelerate the deployment of clean energy technologies. Section 48 provides the Energy ITC, which subsidizes investments in renewable energy systems such as solar, wind, geothermal, and energy storage. This credit applies to projects placed in service before 2025, offering a base rate of 6% of qualified costs, which can increase to 30% with bonuses for meeting certain criteria.
Section 48E, effective for projects placed in service after 2024, establishes the Clean Electricity ITC, extending similar incentives to zero-emissions electricity generation and storage technologies. Like Section 48, it features a base credit of 6%, potentially rising to 30% with bonuses.
Central to maximizing these credits are the PWA requirements, which mandate payment of prevailing wages to laborers and mechanics involved in construction, alteration, or repair work, and the employment of registered apprentices for a specified percentage of labor hours. Projects under 1 MW are exempt from PWA obligations, qualifying automatically for the full credit amount. For larger projects, failure to comply reduces the credit to the base level, underscoring the importance of robust compliance mechanisms like PLAs.
Overview of Prevailing Wage and Apprenticeship Requirements
The PWA provisions aim to promote fair labor practices in the clean energy sector. Prevailing wages must be paid to all laborers and mechanics directly employed on the project site, encompassing construction, alteration, repair, installation, painting, decorating, and related activities. These rates are locality-specific and include fringe benefits.
The apprenticeship component requires that, for projects employing four or more workers, at least one qualified apprentice enrolled in a registered apprenticeship program performs a minimum percentage of total labor hours—typically 10% in 2023, rising to 15% by 2024. Taxpayers must maintain detailed records, including wage determinations, hours worked, and apprentice certifications, to substantiate claims.
Non-compliance triggers penalties, including corrective payments to underpaid workers (wage differentials plus interest) and additional fines per violation. However, the IRA and subsequent Treasury guidance provide pathways for penalty waivers, particularly through the use of qualifying PLAs.
Defining a Project Labor Agreement
A Project Labor Agreement is a pre-hire collective bargaining agreement negotiated between one or more construction labor unions and project owners or contractors for a specific construction project. Unlike traditional collective bargaining agreements that apply broadly to an employer’s workforce, PLAs are project-specific and establish uniform terms and conditions of employment for all workers on the site, regardless of union affiliation.
Key defining characteristics include:
- Uniform Labor Standards: Provisions ensuring all contractors and subcontractors adhere to agreed-upon wages, benefits, work rules, and safety protocols.
- No-Strike/No-Lockout Clauses: Commitments from unions to avoid work stoppages and from employers to refrain from lockouts, promoting project continuity.
- Dispute Resolution Mechanisms: Grievance and arbitration procedures to resolve labor disputes efficiently without litigation.
- Apprenticeship and Training Integration: Requirements for hiring from registered apprenticeship programs, aligning directly with IRA PWA mandates.
- Prevailing Wage Compliance: Explicit commitments to pay at or above prevailing rates, often exceeding minimum requirements.
PLAs are voluntary but are encouraged by federal agencies like the Department of Labor and Treasury for their role in ensuring high-quality, timely project delivery. To qualify under IRA guidance, a PLA must include anti-discrimination provisions, guarantees against disruptions, and mechanisms for binding all parties to its terms.
Types of Companies That Typically Sign PLAs as Standard Practice
PLAs are commonly adopted by entities involved in large-scale, complex construction projects where labor stability and skilled workforce availability are critical. The following types of companies and organizations frequently incorporate PLAs into their standard practices:
- Unionized Construction Firms and General Contractors: Companies with established relationships with building trades unions, such as those affiliated with the AFL-CIO’s Building and Construction Trades Department, often use PLAs to streamline hiring and ensure a reliable pool of skilled workers.
- Infrastructure Developers and Energy Project Owners: Renewable energy developers, utilities, and independent power producers building solar farms, wind facilities, or energy storage systems over 1 MW routinely sign PLAs to comply with federal incentives and mitigate labor risks.
- Public Sector Entities and Government Contractors: Federal, state, and local governments, as well as contractors on publicly funded projects (e.g., those exceeding $35 million under Executive Order 14063), mandate PLAs for predictability and cost control.
- Large Industrial and Commercial Developers: Firms in sectors like manufacturing, transportation, and healthcare, where projects involve multiple trades, use PLAs to coordinate diverse workforces and avoid delays.
Adoption is particularly prevalent in regions with strong union presence, such as the Northeast, Midwest, and West Coast, but is growing nationwide due to IRA incentives.
Other Names a PLA Might Operate Under or Be Called
While “Project Labor Agreement” is the standard term, PLAs may be referred to by alternative names depending on scope, region, or additional community-focused elements:
- Community Workforce Agreements (CWAs): These emphasize local hiring, diversity goals, and community benefits, often used interchangeably with PLAs in urban or socially conscious projects.
- Pre-Hire Agreements: A broader term highlighting the agreement’s timing before hiring commences.
- Project Stabilization Agreements: Focused on maintaining labor peace and stability, common in long-duration infrastructure projects.
- Targeted Hiring Agreements: Variants that prioritize underrepresented groups, apprentices, or local residents, aligning with broader equity objectives.
These terms reflect evolutionary adaptations but retain the core PLA structure of pre-negotiated labor terms.
Benefits of Having a PLA for Taxpayers Claiming the PWA Bonus for Projects Over 1 MW
For taxpayers seeking the PWA bonus under Sections 48 or 48E on projects exceeding 1 MW, a qualifying PLA provides substantial advantages:
- Penalty Waiver and Compliance Assurance: If a PLA is in place and any wage or apprenticeship shortfalls are corrected timely before filing the tax return, no penalties apply, even if initial compliance lapses occur. This reduces financial exposure, as penalties can reach $5,000 per violation, escalating to $10,000 for intentional disregard.
- Enhanced Credit Value: By embedding PWA-compliant provisions, PLAs help secure the fivefold multiplier, elevating the ITC from 6% to 30% of qualified costs—potentially millions in savings for large projects.
- Operational Efficiencies: PLAs minimize disruptions through no-strike clauses and streamlined hiring from union halls and apprenticeship programs, leading to on-time, on-budget completion and reduced overall project costs.
- Risk Mitigation for Credit Transfers: In credit sales or transfers allowed under IRA, PLAs protect buyers from recapture risks if PWA non-compliance is later discovered, preserving 80% of the credit’s value.
- Broader Incentives Alignment: PLAs support integration with other IRA bonuses such as domestic content or energy communities and align with federal priorities for good jobs and workforce development.
In essence, PLAs transform PWA compliance from a regulatory burden into a strategic asset, enabling taxpayers to confidently claim enhanced credits while fostering a skilled, equitable workforce.
Conclusion
The PLA provisions in Sections 48 and 48E represent a forward-thinking approach to integrating labor standards with clean energy incentives. By defining clear pathways for compliance, PLAs empower taxpayers to unlock the full potential of the IRA’s tax credits for projects over 1 MW. As the clean energy sector expands, adopting PLAs—not only as a compliance tool but as a best practice—will be instrumental in driving sustainable growth, job creation, and economic equity. Taxpayers are encouraged to consult with legal, tax, and labor experts to tailor PLAs to their specific projects, ensuring alignment with evolving Treasury and IRS guidance.
